Ag Growth International Inc T.AFN.DB.J

Scotia Analysis - after conf call

[SunsetGrill]

Focused and Delivering

• Pertinent Data
• Pertinent Revisions

Valuation: 8.5x EV/EBITDA on our 2023E
Rating	Sector Outperform
1-Yr. Target	C$55.00
AFN-T	C$37.21
1-Yr. Return	49.4%
Div. (NTM)	C$0.60
Div. (Curr.)	C$0.60
Yield (Curr.)	1.6%
ESG Score	NA

Capitalization
Market Cap. (M)	C$703
Net Debt + Pref. (M)	C$988
Enterprise Value (M)	C$1,691
Shares O/S (M)	19

OUR TAKE: Positive. The focus on operational excellence (i.e., margin), balance sheet delevering (i.e., FCF generation), and profitable organic growth (i.e., incremental ROIC) paid off in 3Q: EBITDA margins expanded 420bp, FCF was ~$50 million (or ~$2.50/share), net debt to EBITDA declined to 4.3x (from 5.1x in 2Q), and incremental ROIC is tracking at ~30% in 2022.

In our view, AFN shares are cheap (~15% discount to historicals). Healthy FCF generation will transfer value from debt to equity (>$10/share in FCF through 2023E). The only remaining potential hurdle is assessing the company’s ability to compound growth on top of a very strong 2022 (and 2021). That being said, we came away from the conference call increasingly confident that EBITDA growth will continue into 2023. First, margins have ramped through 2022, up 180 YTD, but up 420bp in 3Q. Second, there appears to be increasing momentum (and pent-up demand) in the Farm business in Canada and, to a lesser degree, in the U.S. In its operations in Brazil and India, where the backdrop is strong (and admittedly, more variable), it is gaining significant market share. Not everything has to go right for shares to work well. But, if they do line up, we see material upside.

KEY POINTS

Sales and adjusted EBITDA came in 4% and 23% ahead of consensus – with EBITDA reaching a record. On a consolidated basis, sales and EBITDA grew 28% and 65%. All regions reported solid growth, in particular, Brazil sales increased 30% and India sales increased 59%, setting a record. EBITDA margins came in at 19.0%, reflecting a 420bp increase compared with last year, driven by mix (more high-margin portable handling), operational efficiencies, and lower steel prices. Included in its adjusted EBITDA calculation was $15.7 million in “transaction, transitional and other costs”. Our understanding is that this cost will substantially decrease starting in 4Q22 and should trend at less than $4 million.

The company raised its outlook for 2022 EBITDA to >$228 million (from >$215 million) underpinned by a strong backlog which provides six- to eight-month visibility. Given the strength in revenues and margins, we believe management baked in quite a bit of conservatism for 4Q. Further, on its conference call, management highlighted expectations for EBITDA growth in 2023.

3Q FCF generation was $49 million. Working capital investment was neutral despite the increase in sales. We expect the company to generate ~$70 million of FCF in 4Q22. Net debt to EBITDA (including leases) was 4.3x as at the end of 3Q. On the conference call, management indicated that it expects to reduce net debt to EBITDA by about 0.3x in 4Q and delever to the low 3x (excluding leases).

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Note: The payout ratio is calculated based on dividend as a percentage of FFOPS.

Qtly Adj EBITDA (M)	Q1	Q2	Q3	Q4	Year	EV/Adj. EBITDA
2020A	$26	$44	$52	$28	$149	9.1x
2021A	$39	$46	$46	$45	$176	8.3x
2022E	$41	$66	$76	$46	$229	6.8x
2023E	$45	$70	$74	$47	$236	6.0x

AFN reported 3Q22 sales and adjusted EBITDA $402 million and $76.3 million versus consensus of $388 million and $61.9 million (see Exhibit 1).

The company raised its 2022 outlook for the second consecutive quarter. Management is now guiding to adjusted EBITDA of “at least $228 million” in 2022 – up from “at least $215 million” in 2Q; and “at least $200 million” in 4Q. Backlog growth of 4% moderated from recent levels as expected given backlog reached record levels last year. Management noted that demand remains strong and continues to grow and the sales pipeline remains robust.

From a segment perspective:

• Farm sales (55% of consolidated sales) increased 20% y/y and adjusted EBITDA expanded 52%. Sales of portable grain handling equipment were particularly strong due to rising crop prices and low dealer inventories. Adjusted EBITDA benefited from mix and lower input costs related to steel prices. For 4Q22, the company anticipates results to in line with 4Q21.

Exhibit 1 - 3Q22 Results

Source: Company reports; FactSet; Scotiabank GBM estimates.

• Commercial sales (42%) increased 40% y/y and adjusted EBITDA expanded 97%. The company experienced significant growth in all regions; Brazil sales and adjusted EBITDA increased 30% and 67%, respectively. The company expects momentum to continue in Brazil in 4Q. Adjusted EBITDA benefited from scale and lower steel costs. Momentum is expected to continue into 4Q.
• AGI Digital sales increased 9% y/y due to continued strong demand and order in-take. EBITDA was -$4.0 million versus $0.3 million last year primarily due to the change in revenue recognition as a result of moving to a subscription model. YTD EBITDA losses amount to $10 million.
• Regionally, EBITDA rose by 55% in Canada, 52% in the U.S., and 70% in International. Other EBITDA was a loss of $6.8 million versus a loss of $6.6 million last year.

 

Exhibit 2 - Trading at Discount to Peer Group (and Historicals)

Source: Company reports; FactSet; Scotiabank GBM estimates for Ag Growth International Inc. For companies with FYE other than Dec. 31, we have included their results in the nearest calendar year.

Exhibit 3 - Financial Forecasts (in C$ million, unless noted otherwise)

Source: Company reports; Scotiabank GBM estimates.

Company Overview

Company Description

AGI is a leading shortline agricultural equipment manufacturer. The company is a provider of the physical equipment and digital technology solutions required to support global food infrastructure including grain, fertilizer, seed, feed, and food processing systems. AGI has manufacturing facilities in Canada, the United States, Brazil, India, France, and Italy and distributes its product globally. In 2021, 44% of sales were based in the United States, 22% in Canada, and 33% in the rest of the world.

Investment Thesis

The setup for AFN may be as good has it has been for a while. The shares trade at near its lowest EV/EBITDA multiple in more than a decade. Strong growth prospects and moderating steel prices (~30% of COGS in 2020) should boost profits and cash flows into 2022. We think its leverage has peaked. And its margins are likely to improve. Further, with one of the bin projects remediated, we see little incremental risk of negative surprises and believe AFN will look to fully resolve the issue in 2022. The wind down of the bin incident and wind up of profits should enhance FCF and ROIC, accelerating the prospects for delevering and, therefore, aiding the shares to re-rate higher.

Key Risks

Farm economics, crop and trade flows, weather, FX (US$), steel prices, competition